TITLE INSURANCE STOPPED ON REO AND FORECLOSURE SALES

Most of you have been reading about "phony documents" or "fraudulent documents" from lenders in the foreclosure process. Those documents are the affidavits used to obtain a judgment from a court so a foreclosure sale can occur.

If a material document relied upon by the court in making its decision to render a foreclosure judgment (and have a foreclosure sale) is knowingly false, it is a "fraud upon the court" and attackable at any time by any party affected by the court order. This can happen years later. The result could be a setting aside of the foreclosure sale and foreclosure judgment by the court.

Many properties sell either to the lender or to third party bidders at the foreclosure sale, and if there is later a set aside judgment, the title to the lender or third party becomes invalid.

Title insurance underwriters naturally do not want to place insurance where they know there is a high likelihood that there will be litigation over the matter being insured. As a result at least one major title insurer has announced today that it will not insure REO sales until further notice. Old Republic just announced issued the following statement (shortened for brevity by this writer):

Recently, officials at GMAC Mortgage, a division of Ally Financial, Inc., JP Morgan/Chase, and most recently Bank of America announced that they are halting evictions of foreclosed borrowers and are halting REO sales in 23 states, including Florida. In fact, several agents have reported receiving written cancellation of pending transactions involving these lenders. Accordingly, Old Republic policies may not be issued insuring REO sales after completion of foreclosure by these two lenders. There is no prohibition on writing title insurance on short sales or following a deed-in-lieu of foreclosure involving these lenders or any prohibition against insuring titles where a mortgage foreclosure by Ally Bank/GMAC, JP Morgan Chase or Bank of America appears in the back chain of title. We are continuing to monitor this situation and expect to be able to resume insuring REO sales by these lenders as soon as the objectionable issues have been resolved.

To understand the reason for this you need to understand the problem.

Deposition testimony has uncovered that there are two defects in many - perhaps hundreds of thousands - of affidavits of amounts due and similar statements signed by bank representatives. There may also be defects in assignment of mortgage documents.

In the affidavits, the testimony revealed that the signor was, contrary to the assertion in the affidavit, unfamiliar with the loan file. Further, the affidavits were signed not in the presence of a notary and the notary may have not known the affiant. If these affidavits are relied upon by the court in granting the final judgment, and they are false, then they become a "fraud upon the court". Likewise, if the Assignment of Mortgage is defective, it too becomes attackable.

The reason these documents are attackable is because the fraud is intentional and undertaken for the purpose of obtaining the judgment in the lawsuit. Another viewpoint is that rather than "extrinsic fraud", the documents are "intrinsic fraud", meaning they were used for the purpose of obtaining the judgment.

If a property is sold where title to the property was obtained directly from intrinsic fraud, the judgment is not automatically void or invalid. Instead, it is "voidable", meaning it can be set aside upon the request of a party that can show to the court the intrinsic fraud and why that fraud was material to the judgment.

A big question is whether the intrinsic fraud was material to the judgment being granted. If all the facts contained in the otherwise fraudulent document are correct, a judge could decide that, yes the judgment was obtained through intrinsic fraud, but none the less, the judgment will still stand since the underlying facts contained in the affidavit were correct and true.

We need to continue to closely monitor this issue as it affects hundreds of thousands of real estate sales that have and have yet to occurred.

Copyright 2010 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Features abound...mine was much simpler and probably a bit more alarmist that yours. It was written overnight Saturday when I thought no one was taking me seriously. I was at our state convention last Wed-Fri and I swear, no one knew what I was talking about. Amazing. Like Florida, IL is a judicial foreclosure state. We have a barely functioning state government and it's an election year. Ancient Chinese curse is in full swing.

THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL

Florida Real Estate Attorney

Ok - I am going to go down the list and address as many questions as possible:

Last first - Joetta. Who knows, but this can be a big problem and it is because as stated in the end of the article the foreclosure judgments (and sales) could be voided. The lenders are now "reviewing" their documents for these old cases, but what will that do? They cannot "declare" them clean - only a judge can do that based on each file being reviewed not just as to the paper itself, but testimony from those that signed those affidavits in each case.

I think instead, some insurance indemnity will be created by the lenders themselves, which indemnity will be accepted by the insurance underwriters and then we will be good to move forward.

In the meantime, yesterday was the first foreclosure sale day of the week here in Palm Beach County and fully half of the sales were cancelled by the lenders.

Richard, thanks for the great explanation. It will be interesting to see how this problem will show itself in non-judicial states, such as California (because you know fraud was committed by the banks in non-judicial states, too).

"the judgment will still stand since the underlying facts contained in the affidavit were correct and true."

That is my vote.

The provisions for foreclosure are agreed to by the buyer when they accept the deed, deed of trust and note.

Unless the mortgagor can make a showing that they did not default, the rest is technical. While this is an inconvenience and clearly the banks and service companies took short cuts to effect the repossession of the security, the "system" will find a way to cover the banks' butts.

Just my opinion, but I believe that a mass of foreclosed folks are grabbing at straws.

This mess has cause the spread of a new cottage industry of "we can sue the mortgage company to help you keep your home", entities. I hear the advertisements throughout the day on the radio and TV. I believe that they are selling pipe dreams to folks who lost their home and their hope. They're selling hope to a population that has lost all of theirs.

The one two punch of the moratorium on Trustee Sales (no new inventory) coupled with the freeze on closing REO transactions that were already in contract with a Buyer (no closing, no revenue) can't make for a pretty picture for large REO teams with a large fixed overhead - and who knows when things will start moving again?

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